12/27/10

Labor force participation in Sweden

The labor productivity model discussed in the previous post is based on the concept linking labor force participation rate, LFP, to real GDP per capita [1]. This is a primary model, which explains the dynamics and the long-term behavior of labor force level in developed countries. As before, the LFP model is extremely parsimonious and uses only one (!) defining parameter to explain all variations in the observed behaviou of labor force in developed countries. As a consequence, one needs no other macro- or micro-economic variable to explain the portion of labor in total population.

In this post, we do not formally introduce the quantitative model since it is available in the paper and monograph. Our purpose is to extend the previous data set by two years (2008 and 2009) since new observations are now available. This is in line with our validation strategy – to test all models with new data.

Figure 3.13 is borrowed from our monograph and illustrates the predictive power of the model for Sweden. The agreement between the original LFP estimates (open circles) and those predicted by the model is excellent in timing and amplitude. Considering the fact that only one defining variable is used the prediction suggests the presence of long-term on-to-one link between LFP and real GDP. (More examples in the paper and monograph.)

Figure 1 extends the original data set by two estimates (real GDP per capita reported by the Conference Board). The agreement is also excellent. This observation evidences in favor of our model.

We will continue reporting the accuracy of LFP predictions for Sweden and other developed countries.

Figure 3.13. Observed and predicted growth rate of LFP in Sweden: N(1959)=100000, A2=$310 (1990 U.S. dollars), B=2.2∙106, C=-0.0465, T=0. Lower panel depicts the original LFP, changing in the range from 67% in 1990 to 62.5 % in 1998, and the predicted LFP.

Figure 1. Same as in Figure 3.13, but extended with data in 2008 and 2009. The original LFP series is reported by the BLS.

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